I Just Toured 3 Multifamily Properties: Here’s What They Taught Me

After 10 years and going through hundreds of properties, I continue to learn something from every walkthrough. We are in the midst of aggressively looking in our local market for small multifamily properties (3-8 units). Therefore, I have been reviewing a lot of opportunities and just came back from walking through three: a fourplex, a triplex, and a 5-unit.

Two of these properties were mixed use (storefront and apartments), and the other property was just apartments. Each property had an interesting story, so I thought it would be helpful to share my learned lessons. Remember, most properties you walk through are NOT going to work out. However, you do have the opportunity to learn something from every property to help you become an even better investor!

Let’s get some discussion going! What lesson have you learned during your recent walkthroughs of multifamily property?

Leave your comments below!

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About Author

In 2005, Matt founded The DeRosa Group along with his wife, Elizabeth. At the time, the two person company owned and managed two assets – a single family home and a duplex. Over the last nine years, they have grown the company to a 12 person team owning and managing over five million dollars in residential and commercial assets throughout the central NJ and Philadelphia area.

25 Comments

I apologize if this isn’t the proper place to pose this question, but it has to do with something you talked about. You mentioned that if you were going to throw money at a property to make sure you see a return. Anyways, here is my question. I just bought a duplex in which I’m living in. The other unit is rented. There is a detached building on the property with a large room. For 40k I can turn that into a studio apartment and get about $550 rent for it. The only issue is the city won’t allow it to be a separate unit. So all of the utilities will be on my bill. The big deal is when I go to refinance I doubt it will appraise for 40k more than what I paid for the property. Would you still do this and take the extra cashflow or would you wait and put that money towards another property? Units are going for about 100k each here and this “3rd unit” would only cost me 40k. Any thoughts?

It would take you 6 years of consistently getting paid rent with no vacancies or other maintenance issues coming up to get paid back your initial investment, so I would say this is a loser. Mostly because it will not be a legal 3rd unit and you will never get that money back when you sell. Or it will limit your buyer pool to pretty much investors only and as we all know investors only buy when its a good deal.

This is great we have some good chatter going on already! I love it.
Nathan – I acknowledge your entrepreneurial nature here. I don’t like it for a few reasons. Those are that it’s not a legal unit, would be hard to sell and get a return, you are footing all the utilities, and most importantly the return on your investment is slim. If you have the 40k in cash you are much better making that a down payment on another deal. That being said I really like Kevin’s idea of renting that building as one or more storage units. The local zoning will probably allow for that over another residential apartment, and the fit out to get the space rentable would be nominal.
Great conversation!
Matt

Thank you for your reply. Isn’t 6 years to pay a unit off pretty good? I’m not trying to be stubborn here, but after that it is free and clear. If I hold it for 20 years, that’s 14 years (theoretically) of collecting an extra 550-650 without having another mortgage.

I also like the idea of renting it as a storage space. That would require a very minimal amount of money and work on my part. There must be a demand for it because they keep building these storage facilities. I may try to look into where I can find people who are looking for one. Maybe Craigslist? Thanks again for the advice.

On where to go for renting storage, I do own a few a garages and a warehouse that we lease. The warehouse is leased to a few local artists that use it to create their work. We got lucky and bought them with the tenants in place but I have heard that it works to put out a sign (the most probable tenant for a storage unit is local, right around the corner) or craigslist.
On the ROI side, a 6 year return is pretty good but you won’t get that back in a resale because as I recall the property isn’t zoned for that extra unit. To me it just makes more sense to take that 40K and purchase another piece of property.
Matt

Matt, this is just a fascinating audio tour of your 3 property outing, and I really found it interesting. One big take-away from your real world experience- The agents know nothing, and hide the rest! Better know the spreadsheet, better be sharp enough to ask questions that are key to understanding the challenges with the property, better get some underground info using contacts, neighbors on the street, etc. Landlords love to max cash flow with deferred maintenance- then when it comes time to sell, they want to be compared to comps that have kept up with their properties. Can’t have your cake and eat it too, landlords! Buyer beware, every single time!

Nathan, I will be interested to know what Matt thinks about your potential expansion. I have some thoughts myself. If your city is big on rules, might want to know whether you will be in violation of codes for adding a kitchen, etc to your new studio. In Sarasota Florida, I believe the code definition of what is a kitchen is the most beat up page in the code book! Also, go talk to the bank to see what they have to say. They can guide you on whether you will be hurting or helping your refi with them by doing something potentially too funky for them to loan against.

We seem to have two sets of behaviors around here- one for the rehabbers selling to retail home buyers, and an alternate for sellers who sell to other landlords. Landlords don’t care as much about code violations- homeowners who need bank loans do. An illegal improvement can really bring in the extra cash flow- but restrict your exit market when you must sell.

Meantime, think of the possibilities for other uses of that building- sometimes you can get quite a bit for storage, of personal vehicles, office furniture, warehouse goods, equipment- check around. That might require 0 dollars to fix up, 0 maintenance, and no utilities other than a light bulb or two. You can start collecting rent immediately. The next buyer has nothing to worry about with code enforcement. I did this with a barn once- best thing ever!

OOps- I see here that a couple of comments answered Nathan before I got my response in. Fun though, to see that we all agree on forgetting that $40K build-out! That should give you some confidence going forward, Nathan! Good luck with it all.

Yes, our posts must have passed each other on the internet, LOL. Well great minds think alike because I agree with everything you said. I think we would all love to hear more about the barn you leased – how did you locate the tenant, and what did they store in it? Please share!
Matt

Matt, thank you for feedback from touring multi family properties. Having separately metered units seems the only way to keep tenants from running up the utility bill. You talked about the landlord taking value away from his unit by turning it into a duplex. You also mentioned improving cash flow by raising rents and appealing the taxes on the building. Do you have any other quick thoughts on improving the value of the properties you do purchase ?

Hey Thomas,
Great question! Here are a few, off the top of my head…
– add a coin operated laundry in the basement or common area
– If you own multiple properties, put them all on one insurance policy – when we did this we saved 20% on insurance.
– put snow shoveling or landscapping in one of the tenant’s leases. You may have to give them a slight rent cut but it should be cheaper than your costs to pay for the service.

That’s what I can think of for now. Anyone else out there want to chime in?

I recently started looking for small multi-family properties. I’ve only been inside one so far. It was a fourplex that was completely gutted because of a fire a few years ago. I was excited about it. I saw a lot of potential. I was thinking that after rebuilding, I would have a new property that would be mostly maintenance free for 10 plus years. The owner wants too much so I’m not going to buy it.

I have looked at many other multi-family properties online. Everyone that I look at is outdated. I have the constant desire to update everything and over rehab. I want to replace all the doors with new 6 panels, paint all the trim, paint the cabinets, replace countertops, replace flooring, replace appliances, etc. I’m trying to learn to let go of this when I look at these properties. My rehab budget it probably holding me back on some potential good deals.

Hey Russ,
First, I would make an offer on that 4 plex if you didn’t already. Just send them what you would be willing to pay in a formal offer or letter of intent. If he truly is over priced he will come around to reason eventually.
For the renovation budget on the other deals you are looking at, it sounds like you are using a fix and flip mentality on a rental renovation. For a fix and flip you want everything to be new so that you can get top dollar and the buyer’s home inspector won’t tear you apart. For a rental, it’s all about what improvements will make you the most money. Six panel doors will not get you more rent in my opinion (just paint the old doors), but a nice kitchen and bathroom will. New trim won’t pay, but new light fixtures and appliances will. You have to be careful on a rental renovation. If you throw too much money at the place when you are writing it up you might talk yourself out of a good deal!
I hope that helps!
Matt

Hey Penny,
I’m glad you enjoyed! I will be sure to put out some more hands on lessons we are picking up in the field. If you are looking for something specific let me know and I’ll see if I can accommodate!!
Matt

Thank you for taking the time to share those 3 lessons. I am new to REI and am focusing, at the moment, on learning as much as I can from BP and real estate investors like yourself. I am very excited to get started!

Hey Beverly,
Good to hear from you. It’s wise to get educated first. Learn as much as you can from BP! Here are some unsolicited newbie tips:
– make a 1, 3 and 5 year goal list. Where will you be at these milestones? Paint the picture!
– make a list of what assets, skills, talents, contacts, network, or other resources you have at your disposal (take inventory, in a way)
– get out an meet other investors through a local REIA club or on Meetup. Pick their brians!

Hi Beverly –It’s hard to think like a landlord & not a homeowner with your new “baby” (been there) but a bit of extra love is OK & can set the tone that you are looking for better-than-average tenants for your better-average property).
You don’t have to do everything at once – it 6 years of plowing the profits back into the property to do most of the upgrades that I wanted (I still have a few other things I want to do to make it spiffier, but I have all the major eyesores fixed).

Hey Matt, you asked for a little more detail on the barn I had and how I rented it. We bought the property and the barn had lots of junk in it- office furniture. We wanted the seller to clear it all out until we heard she was getting annual rent on it. It was a real estate office, as it turns out, who had nice chairs etc for the occasional presentation or conference, and no place to keep it all in their office. In 5 years or more, we might have had a couple of visits from the owners. I have heard of several uses of garage and even outside space, esp if fenced and reasonably secure, where folks rent out to people with extra cars, trailer, tools, collections, hobby shop items- you name it. Ask around, or post it somewhere. Find out what craigslist, local newspaper ads and local storage unit businesses have to suggest regarding air conditioned and non/AC pricing. Of course, your tenants may be interested themselves! NO maintenance, NO costs- You are gonna love it! I would suggest a lease, up front payment for 6 or 12 months, and that your tenant get an insurance policy on their stuff, or sign a waiver of insurance, so there are no claims against you in case of loss. I guarantee your homeowners policy won’t cover damages.

Everyone can look at any spare space they have– or can make– with an eye for another income stream!